The Lifetime ISA looks simple on paper. Open one before 40, put in up to £4,000 a year, get 25% from the government. That's a maximum £1,000 free each tax year. It's one of the better deals in UK savings.
But the withdrawal penalty is what most guides underplay. And it's the part that matters most when you're deciding whether to open one.
How the 25% penalty actually works
This isn't just "you lose the bonus." The 25% penalty applies to the full withdrawal amount, including your own contributions.
Here's the maths:
| Scenario | Your money | Gov bonus | Total | Penalty (25%) | You receive |
|---|---|---|---|---|---|
| Save 1 year | £4,000 | £1,000 | £5,000 | £1,250 | £3,750 |
| Save 3 years | £12,000 | £3,000 | £15,000 | £3,750 | £11,250 |
| Save 5 years | £20,000 | £5,000 | £25,000 | £6,250 | £18,750 |
In the three-year scenario, you put in £12,000 of your own money and get back £11,250. The penalty doesn't just erase the bonus, it takes a chunk of your capital.
That's the design. The LISA is not a flexible savings account. It's a locked-away account for one of two specific purposes: a first home purchase, or retirement from age 60.
Who should open a Lifetime ISA
First-time buyers under 40, targeting a property under £450,000.
The return is immediate and guaranteed. £4,000 in, £5,000 in the account. No investment product, savings rate, or sign-up bonus comes close to that. Over five years of maximum contributions (£20,000 from you, £5,000 in bonuses), the difference becomes significant.
Two things to check before committing:
- Your realistic property target must be under £450,000. The cap hasn't risen since 2017.
- You and any co-buyer must both be genuine first-time buyers, meaning no property ownership anywhere in the world.
Self-employed people with no employer pension contributions.
Employed workers get employer pension matching, which almost always beats the LISA bonus for retirement saving. Self-employed people get none of that. The LISA's 25% bonus is equivalent to basic-rate pension tax relief. For self-employed savers, a stocks and shares LISA is a legitimate long-term retirement account.
Who should not open a Lifetime ISA
- Anyone without a three-to-six-month emergency fund already in place
- Employed people whose employer offers pension contributions (max those first)
- Higher-rate taxpayers with room left in their pension annual allowance (40% pension relief beats 25% LISA bonus)
- First-time buyers targeting properties above £450,000
- Anyone who might need the money for any purpose other than a first home or retirement
Key rules to know
- Annual contribution limit: £4,000 (counts towards your £20,000 overall ISA allowance)
- Government bonus: 25%, paid directly into the account
- Contribution window: Age 18 to 50 (must be opened before 40)
- Penalty-free access: First home purchase (up to £450,000), age 60+, or terminal illness
- Cash or stocks and shares: Cash LISA for short-term saving (under 5 years). Stocks and shares LISA for retirement or long-term saving.
What's changing in April 2028
The minimum retirement access age for LISAs rises from 60 to 61 in April 2028. This mirrors the rise in the minimum pension access age (55 to 57 from the same date). It applies to all existing LISAs, not just newly opened ones.
If you're planning your retirement income timeline around a specific age, check how this affects your access date.
The decision framework
Open a Lifetime ISA if:
- You're under 40
- Your emergency fund is in place
- You're buying your first home for under £450,000 OR you're self-employed with no employer pension
- You're confident the money will stay in the account until you buy or reach 60
Don't open one if any of those four conditions don't apply. The account is excellent in the right situation and genuinely harmful in the wrong one.
Full breakdown with worked examples and the April 2028 changes: Lifetime ISA UK: Who Should Get One
Also worth reading alongside this: Stocks and Shares ISA UK: What It Is and How It Works for context on how the LISA fits alongside other ISA types.
Originally published at https://test1.demohubz.com/lifetime-isa-uk/
